ROSENBERG: I'm Starting To See Capitulation

David Rosenberg of Gluskin Sheff has been bearish on the economy for as long as we can remember.

But in his latest note to clients, he writes that he's starting to see capitulation, which is when everyone basically gives up on the markets and the economy. This is usually the beginning of a major upturn.

Rosenberg and his firm are now on the look out for reasons to build a bullish thesis.

...we have started the process internally to be on watch for anything that can turn us more positive on the outlook for the economy and the markets. We actually have at least one ball rolling in the right direction, which is some degree of "capitulation", and this is critical in the bottoming process that needs to occur in this phase of heightend economic, fiscal, political and geopolitical uncertainty. People now realize that the Fed and the Federal government are no longer going to ride to the rescue, with the former having already used its bazooka and the latter moving from stimulus to restraint mode and the only question is how much.

We are now in acceptance mode that the government does not always have all the solutions – as if austerity is working in Europe! – so at least the denial phase is over. Just look at the latest AAII survey: bullish sentiment among individual investors plunged 9.7 percentage points in the past week to 28.8% which is 10 points below the long-run norm and bearish sentiment soared 8.9 points to 48.8%. The investor's intelligence poll also showed the bull camp dwindling in the past week from 43.6% to 38.3%, the lowest it has been since mid-June (though they still outnumber the bears who stand at a 28.7% share)...

But Rosenberg's far from all-in.

"The VIX index is also a usefule indicator in times like this. In the eight corrective phases we have seen in the tired four-year old cyclical rally, none bottomed without the VIX index hitting the 27 level at a minimum. On average, the market bottomed with the VIX at 33. The fact that the VIX closed at 18 tells you that there has not yet been enough "fear" to generate a full-fledged panic low to start jumping on. That time will come."